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Can IRS audit the proceeding year after passage of statute of limitation in absence of fraud?

Los Angeles, CA | December 29, 2012 5:29pm

Our tax return was audited by the IRS for 2009 for a depreciation of assets that was claims in 2008 for a S Corporation, but was disallowed to be claimed in 2008 and was carried over to 2009. The S corporation was dissolved later in 2011. The statute of limitation for auditing 2008 has run already. We have told the IRS that the auditable amount of deprecation is a carry-over from 2008 and not occurred in 2009. The IRS now wants to see the 2008 return and details supporting the depreciation in 2008 (purchase receipts, bank statements...etc)

Can IRS look into 2008 even though the statute of limitation for auditing 2008 has passed already. There is no fraud or wrong doing here, but if we cannot ask for a refund after 4 years, why should we let the IRS to look into our books?

Without knowing the entire facts of your case I believe the best answer is the 2009 audit of your 2008 taxes caused the SOL to be tolled. Certain actions by the IRS or the taxpayer can cause the SOL to be tolled. An audit of your 2008 taxes in 2009 probably tolled the SOL. Not knowing how long the IRS looked into your 2008 tax year I am unable to give you a definitive answer to if the SOL has run out.

You admit that your 2009 depreciation deductions are all based on 2008 information. If you withhold all of the 2008 depreciation information the agent may disallow all of your 2009 depreciation. The fixed asset schedules and documents supporting the fixed assets are generally maintained on a permanent basis and not simply destroyed on a four year schedule. You need those records to establish basis in later years. I would not assume that the agent necessarily wants to see all of the 2008 return; unless, they specifically asked for it. I would presume they are only expanding the audit to the prior depreciation documents.

The normal statute of limitations may have passed. However, the fraud statute of limitations is six years. So, it would be fair for them to ask and review that return. You should be aware that they likely already have the numbers in front of them. At the audits I have attended recently the agent had a full three year summary return printed as a comprehensive analysis of the available returns. What he won't have is your detailed depreciation schedule.

You should see an experienced tax attorney to address your concerns of the agent expanding the audit. Only with a full and frank discussion can they advise you what the risks of compliance or non compliance may be.

With some very narrow exceptions that don't sound relevant here, the IRS may ask for any documentation that supports your deductions for the 2009 tax return, even if that documentation is backup documentation for a deduction on an earlier tax return that can't be changed because of the statute of limitations.
If you want the benefit of the carryover deduction, you will need to provide the IRS the documentation it asks for here. If you don't, the IRS will disallow the deduction, and you'll have to explain to a Tax Court judge why you get the deduction over the IRS's objection. The judge, of course, will require you to provide this backup documentation to get the benefit of the deduction. Just cut to the chase and give the IRS what it needs.
In general, it's rarely to your advantage to withhold information from the IRS.

Disclosure Under U.S. IRS Circular 230: The recipient may not use any tax advice contained in this communication, including any attachments, for the purpose of avoiding federal tax related penalties or promoting, marketing or recommending to another party any particular transaction or matter.

Ms. Sykes and Mr. Faucher nailed it. Just for completeness "tolling" a statute of limitations means that the clock stops running as long as the event that caused the tolling is going on. It is much like a "time out" in football. Time passes, but the clock is stopped.